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Cryptocurrency advocates have reacted warmly to an effort by asset manager Reality Shares to gain approval for a ‘partial’ Bitcoin ETF from US regulators.

Less Exposure, Less Rejection?

Announced in a prospectus filed with the US Securities and Exchange Commission (SEC) February 11, Blockforce Global Currency Strategy ETF aims to invest 15 percent of funds into CME Group and Cboe’s Bitcoin futures.

“The Fund is an actively managed exchange-traded fund… that is designed to provide investment exposure to global currencies, both fiat and virtual currencies, that have been widely adopted for use (e.g., as store-of-value, international remittance, foreign-exchange trading) throughout the world,” the prospectus summarizes.

The move comes as the SEC continues to adopt a highly risk-averse stance on the cryptocurrency ETF market.

In January, the applicants behind the VanEck/SolidX ETF withdrew their application due to the US government shutdown, resubmitting it when conditions improved.

Fundstrat Eyes Institutional Appeal

Last week, the SEC’s only Democratic commissioner said that the appearance of a regulated ETF was nonetheless inevitable.

“Getting the stamp of approval from the deepest and most liquid capital markets in the world is hard, and it should be,” Robert J. Jackson Jr. said in an interview.

Reality Shares began offering ETFs tracking blockchain companies last year, and appears keenly aware of the need to avoid too significant an exposure to Bitcoin markets under current conditions.

“The Fund will not invest directly in bitcoin,” it stressed.

Commentators nonetheless appeared buoyed by the news.

“The idea of currency diversified fund holding (Bitcoin) is brilliant and likely attractive to institutional and retail investors. And when approved, moves the ball forward for crypto as an asset class,” Fundstrat Global Advisors senior analyst Tom Lee wrote in response to the application.

What do you think about the Blockforce Global Currency Strategy ETF? Let us know in the comments below!

Commissioner Hester Peirce wants to open the Security Exchange Commission (SEC) to innovation and entrepreneurship. And she calls for a novel and better regulatory framework that is more adaptable to the crypto space.

Commissioner Peirce: SEC to Open the Doors to Innovation

Speaking at an event entitled Protecting the Public While Fostering Innovation and Entrepreneurship: First Principles for Optimal Regulation, at the University of Missouri School of Law, on February 8, 2019, SEC commissioner, Hester Peirce, remarked that the SEC needs to welcome innovation to improve the financial market function and facilitate access to financial markets to all segments of the population.

[W]e regulate an industry that is a key gatekeeper for progress and productivity in the rest of the economy.

Now, the advent of blockchain technology brings a golden opportunity for the SEC to reconsider its approach at handling innovation and entrepreneurship. She explained,

The agency’s opportunity to rethink its approach to innovation also arises out of a decade of technological development related to blockchain and cryptocurrencies. This area has challenged many regulators around the world, and the SEC is certainly no exception. We, along with other regulators, are asking how existing rules apply in this space and whether a new regulatory framework would work better.

Peirce: Decentralization Is at the Root of Our Economic System

Peirce acknowledges that for the SEC, decentralization is particularly challenging because “Blockchain-based networks offer a new way of coordinating human action that does not fit as neatly within our securities framework.” However, she also notes,

Decentralization is nothing new; it is at the root of our economic system; free markets draw on the talents and knowledge of people all across society to produce what society needs.

One of the most critical problems is the fact that the SEC applies securities laws to crypto asset offerings. But when crypto assets are not traded as investment contracts, they are not securities. Thus, according to Peirce, “tokens sold for use in a functioning network, rather than as investment contracts, fall outside the definition of securities.”

In this regard, Peirce worries about the “overly broad” application of the Howey Test, which the Supreme Court designed to determine whether a particular transaction should classify as an investment contract.

According to the Howey Test, to determine whether a blockchain token is indeed a security, the token must meet three specific conditions:

1. An investment of money.
2. In a common enterprise.
3. With an expectation of profits predominantly from the efforts of others.

However, as Peirce points out, not all the blockchain-based projects would be able to pass the Howey Test. And she suggests that Congress might resolve this issue “by simply requiring that at least some digital assets be treated as a separate asset class.”

I look forward to working with you @SECJackson to open the doors to innovation, but we're not a merit regulator issuing seals of approval, so let's encourage investors to do their own work to decide whether an investment is right for them: https://t.co/iMA7NUkLRp

The US Securities and Exchange Commission took a fairly harsh view on ICOs, judging almost all to be undeclared securities. But isn’t that response just reactionary, over-broad and perhaps even a little bit lazy? Canadian messaging company, Kik, are fighting back, and the industry as a whole should be glad that they are.

The Promise Of Untold Wealth

Initial Coin Offerings (or token sales) appeared on the cryptocurrency scene in 2013, with notable offerings from Ethereum (raising $16m) and Stellar ($39m) the following year. They became the darlings of the industry by 2017, allowing unbridled raising of start-up capital, and generally impressive returns for investors.

Like all things crypto, ICOs went thermo-nuclear in 2017, as media-frenzy meant everyone wanted a piece of the action. With seemingly not enough pieces to go round, that $hitcoin you just bought at pre-ICO prices could score a ten-fold return, even before launch.

Enter the criminals and the woefully under-skilled. Through fraud and/or mismanagement, over half of all ICOs collapsed within four months of the token sale. 2018’s Ethereum price free-fall didn’t help matters either. Somebody needed to act.

Saving Every Crypto-investor

In mid-2017, the SEC had issued a balanced and considered report, following investigation into the DAO project. The report warned ICO issuers and investors that securities laws ‘may’ apply to certain token offerings, DAO included. According to the commission, tokens which promised investors a return were essentially securities, implying that tokens with ‘utility’ were not.

This pretty much made sense to everybody. Selling a token as purely an investment was tantamount to selling company stock or bonds. Whereas a utility token didn’t need to go up in value, as it had other… um, utility. The fact that so many did was due to the buzz around any novel digital tokens at the time. That didn’t suddenly make these tokens securities.

Nobody wanted to see scammers in the space, so the scrutiny of the SEC was generally welcome. But still the speculators flocked, and they expected a return from every new token on the block.

They didn’t want the utility of a token, just an asset so they could get rich quick. And when they didn’t, they complained to the SEC… who weren’t very happy about it. Somebody had to save these idiots from themselves.

It started in February 2018, when SEC Chair Jay Clayton asserted that “every ICO I’ve seen is a security.” By June, Ethereum had distinguished itself as ‘not-a-security’, joining only Bitcoin as a decentralized cryptocurrency… although how decentralised is now debatable.

Pretty much everything else now fell into the category of securities, and the SEC started proceedings accordingly.

Through Kik and Kin

Kik’s first dealings with the SEC over their Kin token were friendly enough. Just a few informal questions. But over time, things ramped up and became more serious until the commission finally issued a Wells notice, outlining why they think there has been a securities infraction.

Kik’s defence hinges around the fact that it was sold as, and is in use as, a currency. Currencies being specifically excluded from being securities.

Of course, the internet has roundly mocked this, suggesting it is only used in apps, which Kik funded, but the internet is being a dick. By this argument Fortnite V-bucks are a security, as are Amazon vouchers, and perhaps even supermarket loyalty points.

“But,” says the Internet, “did Pantera and Polychain (who invested millions in the token presale) know that the tokens weren’t expected to make a profit?” with a smug look in its eye.

Sadly, we weren’t privy to that conversation. But at the time (Aug 2017), even if they read the white-paper, they likely still expected price to skyrocket, because, you know… August 2017. That still doesn’t make it a security.

But I Heard ICOs Were Already Dead

And you may well have heard it right here on Bitcoinist, but I respectfully disagree. The ICO has retreated, hurt and scared, into its cave, licking its wounds, and hiding from an uncaring world. How did it fall so far from grace? What must it do the regain its position at the crypto table?

It’s almost guaranteed that that the heavy-handed scaremongering of the SEC spooked the market far more than some dodgy ICO scammers. In trying to protect the greedy speculators with eyes too wide to read the small print, the SEC ensured that everyone got rekt… So thanks for that.

Tokens which clearly are securities, are now being shilled through STOs, but that’s really not in the pioneering spirit of Bitcoin. Neither are registration and securities regulations going to prevent STO investors from getting burned. This is not purely a crypto-phenomenon, and has been going on for as long as securities have existed.

Importantly, the SEC must accept that not all tokens are securities, however much investors wanted them to behave that way.

Kik fighting this in court is a good thing for the entire industry, and we should all hope they win. The SEC have overstepped their remit and need to be told so. ICOs are a perfectly valid way to raise funds in the crypto space. The current position of the SEC is only going to see its country falling behind because the Commission only has jurisdiction in the US.

But if they are challenged and beaten then the (not so) humble ICO could rise again…

Only this time, RTFMWhite-Paper.

Will Kik be successful in taking on the SEC? Share your thoughts below!

The Office of Compliance Inspections and Examinations (OCIE) of the United States Securities and Exchange Commission (SEC) listed the cryptocurrency market as one of the six focus points of its compliance monitoring activities for 2019.

Spotlight on the Cryptocurrency Market

According to a report titled “2019 Examination Priorities,” OCIE says it plans to shine the spotlight on the goings-on in the cryptocurrency. An excerpt from the report relating to cryptocurrencies reads:

Given the significant growth and risks presented in this [the crypto] market, OCIE will continue to monitor the offer and sale, trading, and management of digital assets, and where the products are securities, examine for regulatory compliance. In particular, through high-level inquiries, OCIE will take steps to identify market participants offering, selling, trading, and managing these products or considering or actively seeking to offer these products and then assess the extent of their activities.

To this end, the OCIE plans to examine the activities of firms operating in the digital asset market. This examination will cover sale, trading, as well as the management of cryptocurrency assets. The OCIE also plans to pay particular attention to cryptos deemed to be securities.

Commenting on the approach for 2019, Pete Driscoll, Director of the OCIE, said:

OCIE is steadfast in its commitment to protect investors, ensure market integrity and support responsible capital formation through risk-focused strategies that improve compliance, prevent fraud, monitor risk, and inform policy.

Identifying the virtual currency market as a priority isn’t a new development for the OCIE. Back in 2018, the emerging market also formed part of the OCIE’s agenda. However, the mandate for 2019 appears to be an extension of the goal for last year, which focused primarily on risk and security.

Too Much Regulation?

The expansion of OCIE’s focus on digital assets comes at a time when U.S. Federal Lawmakers are trying to establish a separate regulatory ambit for cryptocurrencies. Some commentators feel the SEC is over-regulating the industry, slowing the rate of innovation in the country with regard to digital assets.

In December 2018, Reutersreported that members of the GOP were frustrated with the leadership of the SEC over their stance on most ICOs being securities. This new report from the OCIE expanding its examination focus might exacerbate such concerns. Meanwhile, for the SEC, the Commission continues to state that strict laws create a safer marketplace.

What do you think about the SEC’s focus on cryptocurrency in 2019? Let us know your thoughts in the comments below!